It has long been a dream of many an MFD to fly with their own wings but nobody was ready to open their cage, but AMFI has finally done what was really long overdue. This golden step will provide a fillip to the mutual fund industry to grow faster, because now MFDs can increase their revenue and have more independence in selecting AMCs and products.
Progressively, with the rationalisation of fund TERs, the trail brokerage offering gap has reduced significantly between national distributors and MFDs. This, supplemented by the gradual rise in margins retained by national distributors to cover their fixed expenses, and the leakages due to GST, has adversely affected the brokerage shared with sub-brokers.
The sub-broker model (broker-dealer) was very popular, and beneficial, when AMCs were paying upfront and trail brokerages based on monthly and yearly business targets and aggregators were able to pass these aggregation benefits to their sub-brokers. Moreover, the support (especially operational support) was crucial for MFDs when they were starting their business. Now, given the various changes on brokerages from regulators, this sub-broker model has not remained very attractive.
Even today, ARN holders are joining national distributors and aggregators only for their non-core facilities to reduce their own costs, especially technology, back-end support, and access to some research. However, these non-core facilities are not available at a fixed cost, but rather on a revenue sharing basis, and this leakage keeps increasing the bigger one’s business becomes with diminishing returns. While it might be helpful up to a certain level of AUM, but above that, it becomes rather expensive.
Let us look at the numbers
We plotted the AUM of an MFD at different levels, and the AMC itself – whether it was a top, middle or moderate (in terms of total AUM). Considering that the aggregator would get a higher trail revenue, compared to an MFD as well as the GST leakages, this is what the typical revenue differential looks like:
In other words, an MFD with a total AUM of Rs.10 Cr stands to gain roughly Rs.4.5 lakh if they move from being a sub-broker to using their own ARN.
(Detailed calculations are given at the end of this article)
This is also a reflection of the high inbuilt costs in a sub-broking model, i.e. what they are paying for the operational and back-office support every year.
While this loss of revenue has been realised by sub-brokers a while back, they have been struggling to move out their clients’ AUM and portfolio from national distributor’s ARN to their own ARN asstraightforward routes were not available. Movement from one ARN to another ARN meant loss of entire revenue.
With this circular, AMFI has opened the door for such MFDs – those interested in building their own identity, following the principal of “My Business, My Brand”.
The financial industry is growing at a good pace, and new-age, non-competing fintech players are entering the industry to offer non-core facilities to MFDs (and other financial advisors). Through the use of technology, they offer far better digital engagement between MFDs and their clients through wider product suites, advisory support and by incorporating the very best practices and including robo-advisory to assist the MFDs. They are offering multi-asset class, multi-product, multi-country, multi-currency, execution capabilities and a wider variety of services – that too at a reasonable, fixed yearly subscription fee.
The only things needed now to move out of national distributors’ ARNs are:
- List of your clients with mobile numbers and email IDs
- List of folios, client-wise and AMC-wise
- Letter for clients’ consent
At Fintso, we are completely equipped with expertise to support with the operational and administrative work required to handle such ARN-to-ARN AUM movement seamlessly. As a platform, Fintso has the robotic process automation tools that assist in moving assets seamlessly, without disrupting the current engagement with MFDs’ clients.
We will help you to set up your practice in a hassle-free manner without any conflict of interest. We possess all the non-core business expertise needed – from product curation, advisory support, execution capabilities, and a client app carrying your brand for consolidation and reporting – leaving you to the core of what you do best – engage with your clients.
Click here to download the circular.
Rajan Pathak is the Co-Founder and MD of Fintso. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
